Ticking Timebomb: The Financial Crisis Reaches Germany's Economy

AUS DEM SPIEGEL

Ausgabe 42/2008

Ticking TimebombThe Financial Crisis Reaches Germany's Economy

The turmoil in the financial markets has reached Germany's real economy with horrifying speed. It is beginning to affect ordinary people, as both investors and employees, and it is already having an impact on German companies. The only remaining question is: How brutal will it get?

Lufthansa is experiencing a drop in advance bookings by business travelers.

In the end, even prayers didn't help. The 4.3 million ($3.1 million) had simply gone up in smoke. That was the sum the Oldenburg State Church had invested with the failed American investment bank Lehman Brothers.

The church, which includes 123 congregations between the northern German town of Cloppenburg and the North Sea port of Wilhelmshaven, was looking for higher returns than it could earn with the dull government bonds in which it normally invested its money. To increase the church's profits, the Protestants' financial experts used some of their assets to buy Lehman securities.

Now the bank is bankrupt, and the faithful have become creditors -- as well as the witnesses of a miraculous transformation -- that of money turning into thin air.

At least the church is not alone in its troubles. Only a relatively small number of Germans invested in Lehman securities or had their money deposited with the currently insolvent Icelandic Kaupthing Bank. But since the first German savers lost money they had believed to be safe, it has been clear that the economic quake that began in the US real estate market more than a year ago, and then spread to Great Britain, Spain and Iceland, has now hit Germany, the world's leading exporter.

The German economy is considered relatively immune to crises in individual markets. Many companies in the machine building, medical and environmental engineering sectors are the undisputed world market leaders in their industries. Because their goods are in demand everywhere, German companies have, until now, felt secure in the knowledge that if sales to the United States or other European countries decline, they could offset the shortfalls by increasing sales to China, India and Russia.

But the current crisis is different, affecting companies in various ways. It is not just a sales volume crisis brought on by consumers and other companies ordering fewer products. It is also a financing crisis, because customers interested in buying goods lack the necessary capital, now that the banks have curtailed lending. And it is also a crisis of confidence, in which those who could buy goods are no longer interested in doing so.

When consumption drops off, companies must cut additional jobs, the markets decline and a vicious cycle of self-fulfilling poor prospects begins. In this way the financial crisis, which had seemed like more of a virtual crisis to ordinary citizens, is becoming a real, palpable drama.

Crisis-Related Cold Feet

DPA

A container ship at the port of Hamburg: Exports fell by 2.5 percent in August compared to the previous month.

In machine building, Germany's most important industry, with its 950,000 employees, customers are cancelling orders. Sales are declining in the automobile industry. To offset the drop in demand, Opel, Ford, BMW and Mercedes-Benz have taken to closing some of their plants for weeks at a time.

Software maker SAP, based in the southwestern German town of Walldorf, has reacted to a decline in demand with a hiring freeze. Publishing houses, like Grüner & Jahr, affected by declining advertising sales, are following suit. Lufthansa is seeing declines in its business travel and cargo business. Real estate brokers report that some customers are even canceling closings at the last minute, either because of crisis-related cold feet or banks changing their minds about previously approved mortgage loans.

This is Germany in the autumn of 2008.

Things are already so bad that it sounds optimistic when Bert Rürup, the head of the German government's economic advisory council, says that he cannot rule out the possibility that the German economy could slide into a recession.

On Tuesday the leading economic research institutes in Switzerland, Austria and Germany presented a joint report to the German government. The report concluded that Germany can only expect miniscule growth of 0.2 percent for 2009. And for the first time in many years, they are predicting rising unemployment figures for next year.

Even Hans-Werner Sinn, the head of the Munich-based Institute for Economic Research (IFO), notes that the situation is "extremely worrisome." Gustav Horn, a German economist with ties to trade unions, sees a "global recession" looming.

Fear of the future is already shaping the behavior of citizens. Many have decided to put off costly purchases, including such luxuries as expensive vacations and more mundane purchase decisions like replacing an older refrigerator. According to Germany's Federal Statistical Office, retail sales declined by 3 percent in August. The Society for Consumer Research expects a lackluster Christmas shopping season.

Tragically, citizens' concerns about the future threaten to accelerate the very economic downturn they fear. As a result, it is not likely to be long before the crisis affects the labor market.

Labor statistics put out by the Federal Labor Office in Nuremberg are still favorable. In fact, Frank-Jürgen Weise, the head of the agency, expects the number of unemployed to fall below the magic number of 3 million in October, for the first time in 16 years. But there are growing signs that this will be the last piece of good news for some time to come.

DDP

Opel production has been temporarily halted in the eastern German city of Eisenach.

Temporary workers are always the first to go. "We have been noticing since May that our business is getting more difficult," says Ingrid Hofmann, the managing director of the employment agency of the same name. She currently employs 12,000 temporary workers. But some of those workers, who had been sent to work for carmakers and their suppliers, have been coming home early lately.

Machine building and plant construction, two of the most stable pillars of the German economy until now, could be especially hard-hit. The industry exports two-thirds of its domestic production. But banks in Europe and the United States have cut back on lending so drastically that the customers of machine builders are finding it more and more difficult to secure the financing they need. As a result, orders are not being placed anymore or are being cancelled at the last minute.

Koenig & Bauer, a manufacturer of printing machines, is already feeling the effects. At the DRUPA printing industry convention in Düsseldorf this spring, the company collected orders worth 170 million ($233 million). But then customers cancelled orders totaling double-digit millions, because they were unable to obtain financing. Orders for another 50 million ($69 million) were at least temporarily suspended.

The company, which has been very profitable in recent years, could even slide into the red in 2008. And because there is no improvement in sight, "we will have to adjust capacity," says Klaus Schmidt, the head of marketing. This is simply management speak for the fact that 700 jobs will probably be cut domestically and abroad. According to Schmidt, this is a not a problem specific to Koenig & Bauer, but one that affects the entire industry.

The entire export sector is coming under pressure. German exports declined by fully 2.5 percent in August alone.